As forecasts go, they have an intrinsic degree of uncertainty. It remains to be argued whether Romania's preset agreements with global organizations (i. e. IMF, EU) make forecasting a little easier, or if in fact, the transitionary character of its economy turns forecasting into a very difficult exercise. Nevertheless, the current section attempts to forecast three main macroeconomic indicators: real GDP growth, unemployment rate, and inflation. Exchange Rate Several considerations need to be made regarding Romania's currency, the "Leu" ("Lei" for plural).
The currency has appreciated against the U.S. dollar due to the high demand for Leu as compared to the dollar. This appreciation is important because oil prices are denominated in U. S. dollars and the real appreciation of the Leu against the U. S. dollar makes the large quantity of oil that Romania imports cheaper. This translates into a beneficial supply shock for the country. Concomitantly, the Leu has remained relatively stable as compared to the Euro over the last three years. This is of crucial importance because 70% of the country's exports go to EU countries and 60% of its imports come from EU countries.
On the other hand, a sharp appreciation of the Leu could shift the balance of exports to imports, which could harm Romania's economy. Ironically, in a country plagued until recently by inflation, now the largest risk to continued growth could be the prospect of high appreciation of the Leu. The authors of this study expect the Leu to continue to gradually appreciate against the USD as the demand for Leu remains high considering that state-owned enterprises continue to be privatized. Real GDP Growth Continued privatization of state-owned enterprises shows no slowing down.
Therefore fixed capital investments from these newly-privatized firms will continue to rise. The positive effect of investment on real GDP will be somewhat countered by the constant rate of consumption. This will remain stable at approximately 68% of GDP, since there will be no real wage growth in the near future. Concurrently, the government will maintain the tight fiscal policy, containing the budget deficit at less than 3% of GDP. Romania's tax structure, in general, is constantly evolving as it becomes more in line with EU norms.
The current high interest rates should continue to spur increased foreign direct investment (capital flows in capital account), an aspect that will be underlined by an increasingly stable and reliable legal environment. At the same time, increased savings will occur in response to higher interest rates as well as greater confidence in the banking systems. This, in turn, will spur investment as more money will be available for lending. In conclusion, taking into account the stability of the Leu's appreciation, of saving rates, and of foreign domestic investment, this study deems that GDP will continue to grow at its 2003 rate of 4.9% in both 2004 and 2005.
Unemployment Rate In 2003, the unemployment rate was 7. 2%, indicating its lowest level since 1993. Based on the real wage recorded in 1997 and 2001 – years where actual GDP was near natural GDP – the equilibrium wage rate is approximately 2. 2 million Lei/person/year (based on 1995 Leu). In 2003, the real wage rate was 2. 6 million Lei/person/year, higher than the relative equilibrium wage. Although the real wage is high and one would expect its level to fall and thus the unemployment rate to decrease, there is an uncertain employment impact associated with the privatization of SOEs.
As firms are privatized, many workers are laid-off and have to find new, similar jobs or retrain themselves for new occupations. This adds a considerable amount of uncertainty to the unemployment forecast. Nevertheless, the authors of this study predict that the unemployment rate will indeed fall from its current 7. 2% level, due to the high real wage. Yet, the study remains hesitant to predict a large drop. More specifically, the forecasted unemployment rate will be 6. 5% in 2004 and will continue to fall in 2005 to 6. 0%. Inflation
This issue is of key importance since Romania had been confronted with high inflation rates until late 2001. The current tight monetary policy will remain active during the forecast period in an effort to curb inflation. This is essential because the rapid expansion of the Romanian economy is pressuring the price level to increase. However, tight monetary policy coupled with high productivity gains (i. e. GDP per capita has increased at 2. 8% per year since 1993) will continue to put downward pressure on future price increases. In retrospect, Romania has made great progress, reducing inflation from 60% in 1998 to 15% in 2003.
This study predicts that this trend will successfully continue. Effectively, the continuing tight policy will allow inflation to fall to 12% in 2004 and on to 10% in 2005. Romania has enjoyed an impressive economic expansion between 1999 and 2003. When comparing this expansion with the economic reality of the early 1990s, a more correct adjective to describe this process is "incredible. " The country has managed to make large strides toward a free-market economy by selling many of the 6,200 state-owned enterprises that were in existence in 1989.
Important successes were also achieved in lowering the double-digit inflation that has typically beleaguered many of the Eastern European countries attempting the transition to a free-market economy. These encouraging accomplishments have been correlated with fruitfully following the path towards EU integration. The legal environment has been restructured and continues to be reformed to be in accord with EU directives. In summary, the analysis contained in this study provides evidence that Romania will continue to prosper and will achieve the stability and efficiency necessary for it to compete with other EU nations.
Romania's real GDP will continue to grow at nearly 5% per year, while the inflation rate will drop steadily (to 12% in 2004, and 10% in 2005) as tight fiscal and monetary policies are kept in place. Last but not least, the country's unemployment rate will also continue to fall from its already low level. Although there is a degree of uncertainty as to how low the unemployment rate can fall, the authors of this study forecast that the rate will decrease to 6. 5% in 2004 and down to 6% in 2005.